GAO

United States General Accounting Office

Report to Congressional Committees

May 2000 TAX SYSTEMS

MODERNIZATION

Results of Review of

IRS’ March 7, 2000,

Expenditure Plan

GAO/AIMD-00-175

Page 1 GAO/AIMD-00-175 Tax Systems Modernization

United States General Accounting Office

Washington, D.C. 20548

Accounting and Information

Management Division

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May 24, 2000

The Honorable Ben Nighthorse Campbell

Chairman

The Honorable Byron L. Dorgan

Ranking Minority Member

Subcommittee on Treasury and

General Government

Committee on Appropriations

United States Senate

The Honorable Jim Kolbe

Chairman

The Honorable Steny H. Hoyer

Ranking Minority Member

Subcommittee on Treasury,

Postal Service, and General Government

Committee on Appropriations

House of Representatives

For over a decade, the Internal Revenue Service (IRS) has aimed to

improve service to our nation’s taxpayers by attempting to modernize its

antiquated tax processing systems that IRS deems “fundamentally

deficient.” However, this program to modernize systems has been plagued

by management and technical weaknesses that jeopardize its success. To

correct these weaknesses, replace the systems, and ultimately improve

service to the taxpayers, IRS requested, and the Congress established, a

$506 million Information Technology Investments Account (ITIA) via the

Department of the Treasury’s fiscal year 1998 and 1999 appropriations

acts.1 The acts limit the obligation of ITIA funds until IRS submits to the

Congress for approval, an expenditure plan that (1) implements the IRS

1

The fiscal year 1998 Treasury and General Government Appropriations Act (Public Law

105-61) and the fiscal year 1999 Omnibus Consolidated and Emergency Supplemental

Appropriations Act (Public Law 105-277).
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Modernization Blueprint,2 (2) meets Office of Management and Budget

(OMB) investment guidelines for information systems, (3) is reviewed and

approved by IRS’ Investment Review Board,3 OMB, and Treasury’s IRS

Management Board, and is reviewed by GAO, (4) meets the requirements of

IRS’ system life cycle management program,4 and (5) complies with

acquisition rules, requirements, guidelines, and system acquisition

management practices of the federal government. These legislative

conditions are consistent with systems modernization recommendations

we have made to IRS but that IRS has not yet fully implemented.

Pursuant to the appropriation acts, this report provides the results of our

review of IRS’ second expenditure plan—entitled March 7, 2000,

Information Technology Investment Account (ITIA) Spending Plan—that

includes reporting on IRS progress against commitments made in its first

expenditure plan submitted in May 1999. As agreed with your offices, we

reviewed IRS’ second plan to determine (1) what progress IRS has made in

meeting the commitments in its first expenditure plan, (2) whether the plan

satisfies the conditions specified in Treasury’s fiscal year 1998 and 1999

appropriations acts, (3) whether the plan is consistent with our open

recommendations on IRS’ systems modernization, and (4) whether we have

any other observations about IRS’ systems modernization efforts. We

briefed your respective offices on the results of our review on March 31,

2000, and, as agreed with your offices, are issuing this report on those

results after finalizing our analysis. Prior to briefing your offices, we also

briefed IRS on our results and incorporated their comments where

2

In the conference report accompanying the fiscal year 1997 Omnibus Appropriations Act

(Public Law 104-208), the Congress directed Treasury and IRS to develop a modernization

blueprint. IRS submitted the IRS Modernization Blueprint to the Congress on May 15, 1997.

It consisted of four principal components: (1) a systems life cycle, which defines the

policies, processes, and products for managing information technology investments from

conception, development, and deployment through maintenance and support, (2) business

requirements, (3) functional and technical architectures, which define the critical attributes

of an agency’s collection of information systems in both business/functional and

technical/physical terms, and (4) a sequencing plan that defines the actions that must be

taken and their schedules and costs to cost effectively evolve from the current to the future

systems operating environment.

3

According to IRS, the Investment Review Board has been replaced by the Core Business

Systems Executive Steering Committee, which is chaired by IRS’ Commissioner.

4

This program includes the policies, processes, and products for managing information

technology investments from conception, development, and deployment through

maintenance and support.
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appropriate. IRS also provided us with oral comments on a draft of this

report, which are in the “Agency Comments” section.

We performed our work from January through May 2000 in accordance

with generally accepted government auditing standards. (See appendix I

for details on our scope and methodology.)

Results in Brief IRS met relatively few commitments in its $35 million first ITIA

expenditure plan, even though the Service later received an additional

$33 million and nearly 5 months of extra time to accomplish the goals set

forth in the first plan. For example, the first plan stated that the systems life

cycle management methodology, known as the Enterprise Life Cycle

(ELC), was to be developed and implemented by October 31, 1999, at a cost

of $8.22 million.5 As of the end of February 2000 and after investing about

$9 million, the ELC had not yet been fully defined, staff had not yet been

trained on its use, and it was not being followed on most projects.

Notwithstanding IRS’ progress to date, we believe that its second

expenditure plan satisfies the legislative conditions placed on the use of

ITIA funds, and it is generally consistent with recommendations contained

in our earlier reports6 for strengthening its modernization management

capability before building new systems. In particular, the second

expenditure plan places appropriate emphasis and priority on

implementing and updating the modernization blueprint (i.e., enterprise

architecture and sequencing plan) in light of recent organizational

restructuring and ongoing business process reengineering as well as

technology advances. Also, the plan provides for fully implementing the

ELC and related software acquisition and investment management

processes and slowing investments in new systems until these management

controls are established.

As was the case with the first plan, the key to IRS’ success will be whether

it effectively implements the second expenditure plan. To improve on its

5

See the background section of this report for a simplified diagram describing the major

ELC phases and milestones.

6

For example, see Tax Systems Modernization: Blueprint Is a Good Start But Not Yet

Sufficiently Complete to Build or Acquire Systems (GAO/AIMD/GGD-98-54, February 24,

1998) and Tax Systems Modernization: Management and Technical Weaknesses Must Be

Corrected If Modernization Is to Succeed (GAO/AIMD-95-156, July 26, 1995).
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performance in implementing the first plan and to establish the much

needed management and technical foundation for modernizing its systems,

IRS will need to adhere to its stated commitment of first establishing the

institutional management and technical processes and the architecture

artifacts that are absolute prerequisites to building a portfolio of

interrelated systems that deliver promised functionality and performance

on time and within budget.

To establish its modernization management and technical foundation

capabilities and refrain from building systems until it does so, IRS has

recently initiated actions, as described in the second expenditure plan, to

redirect and restructure its modernization effort. Until it has completed

these actions, it will continue to lack key modernization and technical

controls, such as a complete and enforced architecture, fully implemented

life cycle methodology, clearly defined contractor roles and

responsibilities, and fully implemented investment management controls.

Therefore, we reiterate our long-standing recommendations to the

Commissioner of Internal Revenue for correcting the above-noted

weaknesses and limiting IRS’ investments in new systems until they are

corrected. In commenting on a draft of this report, IRS concurred with our

findings and conclusions and said that the initiatives in the second

expenditure plan are intended to address the identified management and

technical weaknesses.
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Background Over a decade ago, IRS began its systems modernization program, then

called Tax Systems Modernization (TSM), to establish a virtually paper-free

tax processing environment where taxpayer information would be readily

available to IRS employees for updating taxpayer accounts and responding

to taxpayer inquiries. In 1995, we identified serious management and

technical weaknesses with TSM that jeopardized its successful

completion.7 Accordingly, we made over a dozen recommendations to fix

the problems, such as formulating a comprehensive business strategy,

establishing information technology (IT) investment management

processes, and completing and enforcing an integrated enterprise

architecture. In addition, because of the seriousness of the weaknesses, we

designated TSM as a high-risk IT initiative, placed the modernization on our

list of high-risk federal programs,8 and have continued to monitor this

program.

Since then, IRS has taken some actions aimed at implementing our

recommendations. For example, in May 1997, IRS issued a modernization

blueprint to define, direct, and control investments in modernized systems

and related infrastructure. Also, in December 1998, IRS awarded its Prime

Systems Integration Services (PRIME) contract for systems modernization.

7

GAO/AIMD-95-156, July 26, 1995.

8

High-Risk Series: An Overview (GAO/HR-95-1, February 1995), High-Risk Series

Information Management and Technology (GAO/HR-97-9, February 1997), and High-Risk

Series: An Update (GAO/HR-99-1, January 1999).
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In 1998, the Congress established the ITIA and limited IRS’ obligation of

ITIA funds until IRS submits to the Congress for approval an expenditure

plan that meets certain conditions.9 As mentioned earlier, the conditions

are that the plan should (1) implement the modernization blueprint,

(2) meet OMB’s IT investment guidelines, (3) be reviewed and approved by

IRS’ Investment Review Board, OMB, and Treasury’s IRS Management

Board and be reviewed by GAO, (4) meet the requirements of IRS’ life cycle

program, and (5) comply with acquisition rules, requirements, guidelines,

and systems acquisitions management practices of the federal government.

To date, the Congress has appropriated $506 million for the account via

IRS’ fiscal year 1998 and 1999 appropriations acts.10

In May 1999, IRS submitted its first or “initial” expenditure plan, requesting

about $35 million for modernization initiatives and commitments to be

delivered by October 31, 1999. As part of this plan, IRS also stated its

intention to modernize its systems incrementally and submit incremental

expenditure plans for release of ITIA funds. We reviewed the plan and

reported in June 199911 that this incremental approach was an industry best

practice, and if properly implemented, the plan was an appropriate first

step. However, to measure IRS’ modernization performance and

accountability on this and future expenditure plans, we recommended that

each plan fully disclose IRS’ progress against incremental goals,

deliverables, and benefits set forth in earlier plans. Based on our report, the

House and Senate Appropriations Subcommittees approved IRS’

$35 million expenditure plan in June 1999.

At that time, IRS planned to submit a second expenditure plan in October

1999. However, it was unable to do so on time, and in early December 1999,

submitted to the House and Senate appropriations subcommittees a

“stopgap” funding measure to obligate about $33 million from ITIA until the

next plan was submitted. We reviewed the “stopgap” funding measure and

raised concerns about projects that were scheduled to begin detailed

design and software development before, among other things, the

9

See footnote 1.

10The Congress appropriated $325 million in fiscal year 1998 with the funds set to expire on

September 30, 2000. In May 1998, the Congress rescinded $30 million of this ITIA

appropriation for urgent Year 2000 requirements. In fiscal year 1999, the Congress

appropriated $211 million for ITIA with the funds set to expire on September 30, 2002.

11Tax Systems Modernization: Results of Review of IRS’ Initial Expenditure Plan

(GAO/AIMD/GGD-99-206, June 15, 1999).
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enterprise architecture was completed and the ELC was defined and

implemented. Later that December, the appropriations subcommittees

approved IRS’ $33 million “stopgap” funding measure but in discussions

and correspondence, directed IRS to (1) expedite completion of the

architecture and implementation of the ELC and (2) explain in future

expenditure plans how it plans to manage the risk of performing detailed

design or development work if the architecture is not completed or the ELC

is not implemented.

Subsequently, IRS reassessed its modernization program structure and

plans and restructured the program by scaling back its system development

efforts until it first put in place the requisite modernization management

capability. For example, it has efforts underway to update its

modernization blueprint and implement the ELC. The simplified diagram

below graphically depicts the ELC processes and major milestones that IRS

is working to implement.

Figure 1: Graphic Depiction of IRS’ Enterprise Life Cycle (ELC)

On March 9, 2000, IRS submitted to the appropriations subcommittees its

second expenditure plan that reflected these restructuring decisions and

sought to obligate about $176 million from ITIA. Table 1 summarizes the

expenditure plan, including each initiative’s cost, ELC milestone, and

milestone date.

2 - Architecture

3 - Development

4 - Integration

5 - Deployment

1 - Vision & Strategy

Operations & Support

ELC

Phases

ELC Milestones

Concept

Definition

System

Design

Strategic

Plan

1

Enterprise

Deployment

PostDeployment

Evaluation
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Table 1: Summary of IRS’ Second Expenditure Plan by Initiative, ELC Milestone, Milestone Date, and Amount Being Requested

Dollars in thousands

Proposed modernization initiatives ELC milestone

Date to achieve

milestone Cost

Program-level activities (category total) $66,556

Management Capabilities

Program Management Office N/A 9/30/2000 7,028

ELC Enhancements, Maintenance and Full Deployment N/A 9/30/2000 5,113

Federally Funded Research and Development Contractor N/A 9/30/2000 5,335

Management Reserve N/A N/A 10,507

Subtotal $27,983

Architecture Engineering

Enterprise Architecture and Blueprint 2000 N/A 9/30/2000 8,667

Configuration Management Policies and Procedures N/A 9/30/2000 1,411

Business Integration N/A 9/30/2000 4,012

Subtotal $14,090

Strategic Project Planning

Vision and Strategy, Tax Administration 2 12/31/2000 20,508

Vision and Strategy, Internal Management 2 11/30/2000 3,975

Subtotal $24,483

Project-level activities (category total) $109,766

2001 Release − Development

Customer Communications 3 5/05/2000 2,721

Customer Relationship Management Exam 3 6/30/2000 1,359

Subtotal $4,080

2001 Release − Implementation

Customer Communications 4, 5 5/31/2001 38,389

Customer Relationship Management Exam 4, 5 6/30/2002 7,954

Management Reserve − Filing Season 2001 Release 2,604

Subtotal $48,947

2002 Release − Design

Customer Communications 3 9/30/2000 3,509

e-Services 3 9/30/2000 3,854

Subtotal $7,363

Tax Account Replacement

Customer Account Data Engine (CADE) 3 12/31/2000 15,312

Subtotal $15,312
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IRS’ Progress in

Implementing Initial

Expenditure Plan Fell

Well Short of

Expectations

For its first expenditure plan, IRS requested about $35 million to initiate

selected modernization investments and produce specified deliverables by

October 31, 1999. This plan provided for three categories of investments:

(1) supporting business goals, (2) building management capability, and

(3) planning a modern IT infrastructure. The “supporting business goals”

initiatives included the early phases of selected systems acquisition

projects that are intended to improve service to taxpayers by the year 2001

tax filing season. The “building management capability” initiatives provided

for defining and beginning to institute at the program-level, mature

modernization management and systems engineering processes that are to

permit effective blueprint implementation. The “planning modern

infrastructure” initiatives refer to the first steps in establishing the

technology foundation−such as the networks, operating platforms, and

security systems−upon which to build, interconnect, and operate

modernized system applications.

In December 1999, the appropriations subcommittees approved IRS’

$33 million “stopgap” funding measure. In addition, by March 2000 when

the second expenditure plan was submitted, IRS had five additional months

to fulfill its incremental commitments in the first plan and to address three

new commitments added during IRS’ execution of the first plan. Despite

Integrated Financial System (IFS)

IFS Revenue Accounting

Tax Account Subledger 3 7/30/2000 1,175

Collections Subledger 3 7/30/2000 1,856

Subtotal $3,031

Enabling Infrastructure

Security and Technology Infrastructure Releases (STIR) 3 9/30/2000 8,549

Enterprise Systems Management (ESM) 3 9/30/2000 3,448

Telecommunications Enterprise Strategic Program (TESP) 2 9/30/2000 11,137

Solutions Demonstration Lab (SDL) 3 9/30/2000 2,650

Virtual Development Environment (VDE) 3 9/30/2000 4,400

Enterprise Integration and Test Environment (EITE) 3 9/30/2000 849

Subtotal $31,033

Total $176,322

(Continued From Previous Page)

Dollars in thousands

Proposed modernization initiatives ELC milestone

Date to achieve

milestone Cost
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the extra time and resources, IRS has not met, or does not know whether it

has met, 17 of its 19 commitments. For example, in the plan, IRS committed

to fully implementing the ELC by October 31, 1999. As noted earlier, the

ELC is to provide IRS with a disciplined and institutional approach−that is,

the policies, processes, and products−for managing IT investments

throughout their life cycles. As of February 29, 2000, IRS reported that it

had invested about $9 million in the ELC, but had not yet completely

defined and fully implemented it. In fact, until only recently, none of the

modernization initiatives were following the ELC because IRS and its

contractor staff had not been trained in its use. This is important because

failure to adhere to the management and engineering discipline embedded

in the ELC seriously jeopardizes a project’s ability to deliver promised

capability on time and within budget.

As another example, IRS committed to defining the scope of its Customer

Relationship Management-Exam (CRM-Exam) project, which under the

initial plan, was to include redesigning IRS’ examination processes and

defining system requirements to, among other things, enable faster exam

case resolution. By October 31, 1999, IRS had only begun to work on these

tasks and under its second expenditure plan, had significantly reduced the

scope of what the project would deliver in 2001, electing to postpone other

parts of the project to 2002 and beyond. Similarly, on its security and

technology infrastructure project, IRS committed to developing

(1) requirements and design specifications for the hardware and software

platforms and networks upon which its planned application projects

(e.g., CRM-Exam) would operate, (2) a sequencing plan or “roadmap” for

aligning the development and deployment of its security and technology

infrastructure with these application projects, (3) a detailed “tactical” plan

and schedule to guide the deployment of the infrastructure, and (4) the

costs and benefits of the infrastructure releases for use by the other

initiatives in developing their business case justifications. By October 31,

1999, IRS had not fully met these commitments. Table 2 summarizes IRS

progress against each of its 19 commitments.
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Table 2: IRS’ Progress in Meeting Initial Expenditure Plan Commitments

a

Meeting its commitments means that IRS met the deliverables indicated in the initial expenditure plan

within 125 percent of estimates for time and cost.

b

IRS has not yet conducted reviews of these initiatives and therefore cannot report at this time whether

commitments were met.

c

These projects were added after submission of the initial expenditure plan.

Modernization initiative

IRS documents show whether initiative

met commitmentsa

IRS is in the process of

determining initiative statusb

Yes No

Business goals

Business Systems Planning (BSP) X

Customer Account Data Engine (CADE) X

Correspondence and Document on Demand Imaging

(CADDI)

X

Customer Relationship Management (CRM) Exam X

Customer Relationship Management (CRM) Core X

Customer Relationship Management (CRM) Collection X

Customer Communications X

e-Services: Near Term X

Integrated HR System: Integrated Personnel System

(IPS)

X

Integrated Financial System: Revenue Accounting X

Enabling infrastructure

Infrastructure Program Management and Integration

Office (IPMO)

X

Security and Technology Infrastructure Releases (STIR) X

Enterprise Systems Management (ESM) X

Telecommunications Enterprise Strategic Program

(TESP)

X

Solution Demonstration Laboratory (SDL) and Virtual

Development Environment (VDE)c

X

Management capabilities

Enterprise Program Management Office (EPMO) X

Process Partnership Management Team (PPMT) X

Business Integration (BI)c X

Architecture Engineeringc X

Total 2 7 10
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Second Expenditure

Plan Satisfies

Legislative Conditions

IRS’ second expenditure plan satisfies the conditions that the Congress

placed on the use of ITIA funds. Nonetheless, because the plan is to be

executed over many months, it does not provide that the IRS life cycle

program requirements, OMB investment guidelines, and federal acquisition

rules and management practices will be employed and adhered to on all

projects throughout the period covered by the plan because full

implementation of these requirements will not occur until September 2000.

Our assessment of the plan’s satisfaction of each condition is detailed

below.

Condition 1: Implements the

Modernization Blueprint

IRS’ second expenditure plan provides for implementation of the

modernization blueprint, but the Service is still working to establish a

reliable date for completing the planned update of the blueprint. Developed

in May 1997, the blueprint includes, among other things, high-level

functional and technical architectures and a general transition plan

describing the timing of the introduction of new systems to establish the

modernized systems environment. We reviewed the May 1997 blueprint,

and in February 1998, reported that it was a good first step but that it

lacked sufficient precision and detail upon which to build modernized

systems. Accordingly, we made recommendations to complete the

blueprint as part of a longer-term implementation strategy, and IRS agreed

to implement them.12

In mid-1998, following the enactment of the IRS Restructuring and Reform

Act13 and the announcement of IRS’ plans to restructure its organization,

we told IRS’ Chief Information Officer (CIO) that the blueprint still needed

to be completed, including being updated to reflect the act’s requirements,

planned organizational changes and associated business process

reengineering efforts, and advances in technology. The CIO agreed, stating

that IRS already planned to do so. IRS’ first expenditure plan reflected this

commitment. Specifically, it included blueprint implementation initiatives

aimed at updating the 1997 blueprint and beginning system acquisition

projects that were discussed in general terms in the 1997 blueprint, such as

establishing a modern corporate database for taxpayer accounts.

12GAO/AIMD/GGD-98-54, February 24, 1998.

13Public Law 105-206, July 22, 1998.
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IRS’ blueprint implementation strategy, as described in the second

expenditure plan, continues planning steps on various projects mentioned

in the blueprint, such as the taxpayer account database project, which IRS

calls the Customer Account Data Engine. The second expenditure plan also

provides for planning (i.e., requirements definition and preliminary design)

for certain new system investments cited in the 1997 blueprint. In addition,

the plan provides for updating the 1997 blueprint. For example, the plan

seeks about $8.7 million to develop an integrated set of about

50 architectural artifacts that are intended to describe in business and

technical terms the nature and characteristics of IRS future mode of

operations.

We reviewed the framework that IRS is using to construct this updated

blueprint and found it to be consistent with published government and

private-sector frameworks for enterprise architectures. We also found that

IRS’ stated approach for updating the blueprint provides for integration of

efforts to reorganize, restructure, and reengineer IRS’ business areas, with

efforts to specify the technology framework within which to modernize the

systems to support these business areas. Additionally, we found that IRS’

stated approach also provides for addressing business areas not covered by

the 1997 blueprint, such as IRS’ internal management and administrative

business functions.

The second expenditure plan commits to completing the revised blueprint

by September 30, 2000. However, at the time of our review, IRS did not yet

have the detailed work breakdown structures, including the resource needs

and schedules, to support this milestone. IRS officials recognize the need to

develop this support and told us they were in the process of doing so.

Without this supporting analysis and decomposition of work steps,

resource needs, and time frames, there is limited basis for confidence in the

September 30, 2000, milestone.

Condition 2: Meets the

Requirements of IRS’ Life

Cycle Program

IRS’ second expenditure plan provides for meeting the requirements in IRS’

life cycle management program, which IRS refers to as its ELC. According

to the plan, the ELC is to be completed and implemented by September 30,

2000, at a cost of $5.1 million. As of March 2000, IRS had developed a work

breakdown structure and supporting resource and schedule plans for

accomplishing this. Among other things, these detailed plans called for

creating a baseline version of the ELC that included such missing

components as life cycle management requirements for system security

accreditation. Additionally, the plans called for incorporating relevant
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components from ongoing IRS efforts to define and implement OMBrequired processes for IT investment management (i.e., investment

selection, control, and evaluation), such as its recently developed

procedures for preparing business case justifications. The plans also called

for ELC training for both IRS and PRIME contractor staff. However,

because the second expenditure plan provides for investing in systems for

several months before these planned ELC efforts are completed, it does not

anticipate that life cycle requirements will be met on all projects during the

period covered by the plan.

Condition 3: Meets OMB

Information Systems

Investment Guidelines

IRS’ expenditure plan provides for meeting OMB investment guidelines by

September 30, 2000.14 OMB’s guidelines call for agencies to adopt a datadriven, analytically based approach to selecting, controlling, and evaluating

IT investments. The overriding objective is to ensure that investment

decisions are made in a disciplined and rigorous manner based on

established criteria, such as return-on-investment and architectural

compliance, and to the extent possible, that system investments be broken

into a series of increments.

To complement its ELC and support management of the modernization, IRS

recently decided to incorporate its ongoing efforts to define and implement

investment management processes, which IRS refers to as its Investment

Decision Management (IDM) processes, into its ELC efforts. Thus far, IRS

(1) has developed business case procedures that are intended to ensure

that system investment decisions are based on compelling return-oninvestment justifications and (2) is working on completing other IT

investment management processes. IRS plans to complete and implement

its IDM processes, including their integration with the ELC, by September

2000. Consequently, the second expenditure plan does not provide for

adherence to OMB’s guidance until September 2000, when IRS’ IT

investment processes are scheduled to be implemented.

14Evaluating Information Technology Investments, A Practical Guide, Version 1.0 (Executive

Office of the President, OMB, November 1995) and OMB Memorandum M-97-02, Funding

Information Systems Investments (October 1996).
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Condition 4: Reviewed and

Approved by IRS, Treasury’s

IRS Management Board, and

OMB and Reviewed by GAO

IRS’ Core Business Systems Executive Steering Committee (which

replaced IRS’ Investment Review Board), Treasury’s IRS Management

Board, and OMB approved the $176 million expenditure plan on March 9,

2000, and sent it to the Congress that day. With its March 14, 2000, letter to

us, IRS enclosed a copy of the plan submitted to the Congress, and we

reviewed it. We then briefed the staffs of the House and Senate

Appropriations Subcommittees on our review, and the results are

contained in this report.

Condition 5: Complies With

Federal Acquisition Rules,

Requirements, Guidelines,

and Management Practices

IRS’ second expenditure plan provides for complying with federal

acquisition rules and management practices by September 30, 2000.

According to federal acquisition laws, rules, and regulations,15 agencies

should, among other things, use disciplined decision-making processes for

planning, selecting, managing, and controlling the acquisition of IT. By

doing so, they mitigate the risks of acquiring systems that are not delivered

on time and on budget and do not work as intended.

As mentioned earlier, IRS’ expenditure plan calls for implementing the

ELC, which is to include mature software acquisition management

practices and IT investment management processes. In particular, IRS

plans to implement mature software/systems acquisition management

practices within its Business Systems Modernization Office, which is the

IRS program office responsible for managing the PRIME contractor and

other modernization contractors. In doing so, IRS intends to build the

capability in accordance with the Software Engineering Institute’s (SEI)

software acquisition capability maturity model requirements.16 Among the

maturity model’s requirements are disciplined and rigorous processes for

acquisition planning, contractor solicitation, contractor tracking and

oversight, and acquisition risk management.

15For example, see the Clinger-Cohen Act of 1996, OMB Circular A-109, and the Federal

Acquisition Regulation.

16A model developed by the SEI at Carnegie Mellon University to evaluate an organization’s

software acquisition capability.
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While IRS’ second expenditure plan provides for implementing these

acquisition capabilities, it does not anticipate this being done until

September 2000. Consequently, the second expenditure plan anticipates

that these capabilities will not be implemented until after the first six

months of plan execution. The absence of these capabilities, which we

independently verified to be the case on two modernization projects under

the first expenditure plan,17 can greatly reduce the chances of the projects

delivering promised system capabilities on time and within budget.

Second Expenditure

Plan Is Generally

Consistent With Our

Past

Recommendations

In 1995, we first made recommendations for correcting serious and

pervasive modernization management and technical weaknesses. Since

then, IRS has taken actions aimed at implementing our recommendations.

We have been monitoring IRS’ actions and have made follow-up

recommendations that recognize IRS’ progress and define residual steps

that IRS needs to take to ensure that it is ready to and capable of

modernizing its systems effectively.

Our open recommendations fall into three categories: (1) completing the

modernization blueprint, (2) developing the management and engineering

capability to modernize systems effectively, and (3) until the first two

recommendations are implemented, limiting modernization spending to

certain small, cost-effective, low-risk efforts. In addition, based on our

review of IRS’ first expenditure plan, we added the following two

recommendations that also remain open: (1) ensure that future

expenditure plans fully disclose IRS’ progress against incremental goals,

deliverables, and benefit expectations specified in preceding plans and

(2) fully define and explain in the second expenditure plan the nature and

functioning of IRS’ “partnership” with its contractors, including the

respective roles and responsibilities of IRS and its contractors.

IRS’ second expenditure plan is generally consistent with these

recommendations. For example, the plan provides for updating the

17We performed an SEI software acquisition capability maturity model evaluation on two

projects contained in the first expenditure plan (Customer Communications and Electronic

Services) and found that collectively IRS had many weaknesses in the following key process

areas: acquisition risk management, contracting tracking and oversight, evaluation, project

management, requirements development and management, and software acquisition

planning. Because of the number and nature of weaknesses found, IRS’ current acquisition

capability is unlikely to result in quality software products being produced on time and

within budget.
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modernization blueprint. Further, the plan provides for detailing

IRS/contractor roles and responsibilities and completing and implementing

system life cycle and investment management controls, including mature

software acquisition capabilities and other related controls. IRS plans to

have all of these capabilities and controls implemented by September 30,

2000.

In addition, the plan does not prematurely seek funds to build systems

(i.e., perform detailed system design and software development activities),

with two exceptions—Customer Communications 2001 Release and CRMExam 2001 Release. The purpose of the Customer Communications project

is to improve taxpayer telephone access to customer service

representatives and other sources by introducing new call routing

capabilities. The purpose of the CRM-Exam project is to provide revenue

agents the tools needed to perform complex tax calculations quickly during

audits. We reviewed the extent of detailed design and new software

development associated with each of these near-term projects and found

both were more akin to system maintenance projects than modernization

projects, thus representing minimal technical risk. More specifically, the

Customer Communications project primarily involves the purchase of

more powerful and standard hardware and operating platforms and

commercial off-the-shelf (COTS) software. Similarly, the CRM-Exam

project is largely a COTS application software upgrade for agent laptop

computers. Equally important to these projects’ technical risk is whether

they will produce a positive return on investment. While as of the time of

our review, IRS had yet to prepare business case justifications for these

projects to demonstrate that it had a cost-benefit basis for proceeding with

development and implementation, IRS officials stated that such business

cases, as specified in the ELC, are a prerequisite to proceeding.

Other Observations on

IRS’ Plan and

Modernization Efforts

Our review disclosed three additional observations concerning IRS’ second

expenditure plan and management of the modernization. First, IRS is in the

process of restructuring its modernization program management office,

which it calls its Business Systems Modernization Office (BSMO). This

restructuring is not included in IRS’ second expenditure plan because the

BSMO is not funded from ITIA, but rather out of IRS’ Information Systems

appropriation. Second, IRS is in the process of changing its approach to

defining task orders for the PRIME contractor to improve IRS/PRIME risk

allocation, leverage PRIME solution innovation, and clearly fix

accountability for contract deliverables. Third, the cost estimates provided

for most initiatives in the second expenditure plan were “rough estimates”
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Page 18 GAO/AIMD-00-175 Tax Systems Modernization

provided by the PRIME contractor and were neither based on detailed cost

analysis of initiatives’ component tasks, deliverables, and time frames nor

were they subjected to IRS’ independent analysis and negotiation.

IRS Does Not Yet Have a

Fully Operational

Modernization Program

Office

To effectively establish and implement the management and technical

controls previously discussed, such as an enterprise architecture and

mature acquisition processes, IRS must have a well-structured and fully

operational BSMO. IRS currently lacks such a BSMO, although it has

established certain immediate-need BSMO functions, and it is in the

process of defining structures, plans, and schedules for making this office

fully operational. For example, it has established a systems engineering and

architecture office to update, implement, and enforce the modernization

blueprint; created major project offices to manage and oversee PRIME

contractor progress on the projects; and established a process

management group to define and implement the ELC. However, it still

needs, for example, to appoint a full-time manager to head the program

office and incorporate other important functions essential to effectively

managing the acquisition of software-intensive systems, such as quality

assurance, risk management, and configuration management. IRS officials

stated that they are in the process of operationalizing the BSMO and

addressing each of these areas.

IRS’ plans for its BSMO are not discussed in its second expenditure plan

because according to IRS, the expenditure plan only covers contractor

costs and does not include IRS’ internal costs of managing the

modernization. That is, IRS is only funding PRIME and support contractors

(e.g., the Federally Funded Research and Development Contractor) out of

ITIA, and is funding internal management costs out of its Information

Systems and other appropriations. For example, from October 1, 1998,

through December 31, 1999, IRS reported that it spent about $17.0 million

for internal modernization management related costs.

IRS Is Strengthening Its

Approach to Defining

Contract Taskings

Under IRS’ contract with the PRIME contractor, IRS has been issuing task

orders to that contractor specifying activities to be performed, support to

be given, and difficult-to-measure deliverables to be produced. Further,

these task orders were generally not definitized, meaning that IRS and the

contractor never concluded negotiations to establish fixed prices and

milestones for the work and products delivered. Instead, IRS was largely

paying for the contractor’s time and materials for work to be performed for

as long as it took to complete the work.
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Page 19 GAO/AIMD-00-175 Tax Systems Modernization

According to IRS officials, they decided to change their approach to

defining task orders because the current approach was not, among other

things, bringing the PRIME contractor’s innovative expertise to bear at the

least possible cost and was not sharing modernization risks with the

PRIME contractor. IRS is now in the process of implementing performancebased task orders. Under this approach, the contractor is given work

objectives and the discretion on how to best meet them. Additionally, the

contractor agrees to a fixed price cost for the work to be performed. To

implement performance-based task orders, IRS recently canceled the

majority of its existing task orders, trained its staff on performance-based

contracting, defined new task orders, and scheduled reviews to begin in

mid-May 2000 for task order approval and award.

Reliability of Funding

Requests for Most

Expenditure Plan Initiatives

Is Unclear

IRS’ second expenditure plan requests about $176 million to fund nine

initiatives (see table 1 for each initiative’s respective funding amount).

While we did not independently validate the amounts requested for each

initiative, we did determine the extent to which the amounts were based on

verifiable analysis and rigorous estimation processes, and whether the

amounts were subject to government assessment and negotiation. With the

exception of three initiatives, we found that the reliability of the funding

estimates in IRS’ second plan is unclear. Specifically, the estimates for most

of the planned initiatives were contractor-provided gross estimates that

were not based on a rigorous decomposition of the steps needed to

complete the initiatives (i.e., detailed work breakdown structures of tasks

and deliverables), and were not subjected to an IRS independent cost

assessment or negotiation with the PRIME contractor. This is not so much

a concern for the two near-term release initiatives (Customer

Communications 2001 Release and CRM-Exam 2001 Release) because the

primary cost drivers for them are largely hardware and COTS software, the

costs of which are easier to estimate reliably. However, it is a concern for

the other initiatives because the cost driver for these is largely labor, which

requires clear and complete decomposition of work tasks to predict

reliably. Of these other initiatives, we found that only the Integrated

Financial System initiative had a detailed work breakdown structure and

schedule.

Conclusions IRS’ performance in implementing the first expenditure plan has not met

expectations. A primary reason for this performance shortfall has been IRS’

inability to define and implement requisite modernization management and

technical controls, such as an enterprise architecture and a systems life
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Page 20 GAO/AIMD-00-175 Tax Systems Modernization

cycle methodology that includes mature software acquisition capabilities

and IT investment management processes. These control weaknesses are

the same ones that led to over $3 billion in wasteful spending on IRS’ prior

attempt to modernize, and the same ones that our long-standing

recommendations are designed to address.

Notwithstanding IRS’ performance to date, its second expenditure plan

includes initiatives that are intended to complete unfinished work started

under the first plan, define and implement missing management and

technical controls, and proceed in a manner that is generally in line with

legislative mandates and our open recommendations. Equally important,

the plan does not propose investing in new systems beyond ELC milestone

3, which is also consistent with our open recommendations for not building

systems (i.e., developing detailed system design and writing softwareintensive applications) until these controls are in place and functioning. In

our view, before any investment initiative proceeds past this milestone, it is

vital that it be justified by a thorough, compelling business case, and that it

employ full ELC rigor and discipline, including mature acquisition

processes and associated investment management processes. Additionally,

for any initiative proceeding past this milestone in advance of completing

IRS’ enterprise architecture, it is critical that the technical risks of doing so

be defined and mitigated.

Because of the comprehensive nature of our current set of open

recommendations, we are not making additional recommendations at this

time. However, we wish to emphasize to the Commissioner of Internal

Revenue that these open recommendations remain operative and

applicable, and they will remain so until IRS (1) addresses the

modernization technical and management weaknesses discussed in this

report by establishing the requisite controls, such as a complete and

enforced enterprise architecture/blueprint and a complete and fully

implemented ELC, and (2) does so before it begins building new, softwareintensive systems.

Agency Comments IRS provided oral comments on our briefing results and a draft of this

report, and we incorporated its comments where appropriate. In

commenting on the briefing and draft report, IRS concurred with our

findings and conclusions and said that the initiatives in the second

expenditure plan are intended to address the identified management and

technical weaknesses.
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Page 21 GAO/AIMD-00-175 Tax Systems Modernization

We are sending copies of this report to Senator Max Baucus, Senator

Robert C. Byrd, Senator Orrin G. Hatch, Senator Joseph I. Lieberman,

Senator Daniel Patrick Moynihan, Senator William V. Roth, Jr., Senator Ted

Stevens, and Senator Fred Thompson, and to Representative Bill Archer,

Representative Dan Burton, Representative William J. Coyne,

Representative Stephen Horn, Representative Amo Houghton,

Representative David R. Obey, Representative Charles B. Rangel,

Representative Jim Turner, Representative Henry A. Waxman, and

Representative C.W. Bill Young, in their capacities as Chairmen or Ranking

Minority Members of Senate and House Committees and Subcommittees.

We are also sending copies to the Honorable Charles O. Rossotti,

Commissioner of Internal Revenue; the Honorable Lawrence H. Summers,

Secretary of the Treasury; and the Honorable Jacob J. Lew, Director of the

Office of Management and Budget. Copies will also be made available to

others upon request.

If you or your staffs have any questions about this report please contact us

at (202) 512-6240 or by e-mail at hiter.aimd@gao.gov or

rhodesk.aimd@gao.gov. Key contributors to this report are listed in

appendix II.

Randolph C. Hite

Associate Director

Governmentwide and Defense

Information Systems

Keith A. Rhodes

Director, Office of Computer

and Information Technology Assessment
Page 22 GAO/AIMD-00-175 Tax Systems Modernization

Appendix I

Objectives, Scope, and Methodology ApApenednxidexiIs

Pursuant to the Department of the Treasury’s fiscal year 1998 and 1999

appropriations acts, the Congress limited IRS’ obligation of ITIA funds until

IRS and Treasury submitted for its approval an expenditure plan that per

the acts, (1) implements the IRS Modernization Blueprint, (2) meets OMB’s

investment guidelines for information systems, (3) is reviewed and

approved by IRS’ Investment Review Board,1 OMB, and Treasury’s IRS

Management Board and is reviewed by GAO, (4) meets the requirements of

IRS’ system life cycle management program, and (5) is in compliance with

acquisition rules, requirements, guidelines, and system acquisition

management practices of the federal government. To satisfy this legislative

mandate, we reviewed IRS’ March 7, 2000, expenditure plan. This was IRS’

second such plan submitted to the Congress. As agreed with the Senate and

House Appropriations Subcommittees, our objectives were to determine

(1) what progress IRS has made in meeting the commitments in its previous

expenditure plan, (2) whether the plan satisfies the conditions specified in

IRS’ fiscal year 1998 and 1999 appropriations acts, (3) whether the plan is

consistent with our open recommendations on IRS’ systems

modernization, and (4) whether we have any other observations about IRS’

systems modernization efforts.

To determine IRS’ reported progress in implementing its first expenditure

plan, we identified in the initial plan the tasks and deliverables that IRS had

committed to deliver by October 31, 1999, with the $35 million approved by

the Congress as well as initiatives added during the execution of the plan.

We then compared this with IRS’ progress as reported via its second

expenditure plan, management readiness reviews, and other progress

tracking documents. We also interviewed IRS and contractor officials

responsible for tracking modernization program progress.

To determine whether IRS’ expenditure plan satisfied the conditions

specified in appropriations acts,2 we first identified and reviewed the

relevant IRS and federal documents referenced in the statutory conditions,

such as the modernization blueprint, OMB information systems investment

guidelines (e.g., Raines Rules), and the Federal Acquisition Regulation. We

then documented IRS’ completed, ongoing, and planned modernization

1

According to IRS, the Investment Review Board has been replaced by the Core Business

Systems Executive Steering Committee, which is chaired by IRS’ Commissioner.

2

Public Law 105-61, Treasury and General Government Appropriations Act, 1998, and Public

Law 105-277, Omnibus Consolidated and Emergency Supplemental Appropriations Act,

1999.
Appendix I

Objectives, Scope, and Methodology

Page 23 GAO/AIMD-00-175 Tax Systems Modernization

initiatives. To do this, we reviewed IRS’ March 7, 2000, second expenditure

plan, entitled the Information Technology Investment Account Spending

Plan, and other supporting documentation, such as the individual

initiatives’ project plans and descriptions, briefings, the PRIME contract

and associated task orders, and Executive Steering Committee agendas

and decision papers proposing courses of action. We also interviewed IRS’

Chief Information Officer, other IRS officials, and PRIME contractor

officials working on the modernization program to gain an understanding

of what IRS is doing to satisfy the legislative conditions. This included

receiving weekly briefings and reports on how IRS and contractor teams

were progressing on ongoing initiatives, such as efforts to improve

customer service, update the modernization blueprint, build the capability

to acquire systems effectively, establish a new system development life

cycle methodology (i.e., ELC), define IRS and contractor roles and

responsibilities, and establish the systems modernization program office.

We also reviewed the business and systems development life cycle

methodology that IRS is modifying to develop its ELC and were briefed by

IRS and its contractors involved in this effort. We also attended IRS’

Executive Steering Committee meetings to determine how the

modernization program was being managed, including IRS’ strategic

modernization approach and progress. Last, we analyzed each of IRS’

modernization initiatives vis-à-vis the statutory conditions to identify any

variances or inconsistencies.

To determine whether IRS’ second expenditure plan is consistent with our

past systems modernization recommendations, we extracted from our

inventory of open recommendations those pertaining to IRS’ modernization

and grouped them into the following three categories: (1) completing the

modernization blueprint, (2) developing the management and engineering

capability to modernize systems effectively, and (3) limiting modernization

spending to certain small, cost-effective, low-risk efforts until the first two

recommendations are implemented. We added to these categories our

recent recommendations based on our review of IRS’ first expenditure

plan. We then compared IRS’ efforts on its completed, ongoing, and

planned initiatives with the intent of our open recommendations to identify

any variances or inconsistencies.

To determine other observations on IRS’ management of the systems

modernization program and the second expenditure plan, we attended

Executive Steering Committee meetings to ascertain relevant program

issues, such as IRS’ decision to redirect and restructure the program and

the impetus for this mid-course correction. To learn more about the
Appendix I

Objectives, Scope, and Methodology

Page 24 GAO/AIMD-00-175 Tax Systems Modernization

underlying causes for and IRS’ progress in redirecting the program, we met

with and interviewed the Chief Information Officer and IRS program

officials responsible for the day-to-day management and control of the

modernization. To assess the readiness of the BSMO, we met with the

Business Systems Modernization Executive and other BSMO officials to

understand IRS’ plans and the steps it is taking to make this office

operational. In addition, to assess the reliability of the cost estimates

provided in IRS’ second expenditure plan, we reviewed the estimates and

supporting documents provided by the contractor and IRS for each of the

initiatives in the plan to determine whether there was an objective basis for

each. We also interviewed IRS and contractor officials to understand the

processes that they followed in developing the estimates used in the plan.

We performed our work at IRS headquarters in Washington, D.C., and its

facility in Lanham, Maryland, from January 2000 through May 2000 in

accordance with generally accepted government auditing standards.
Page 25 GAO/AIMD-00-175 Tax Systems Modernization

Appendix II

GAO Contact and Staff Acknowledgments ApendxiI

GAO Contact Gary Mountjoy, (202) 512-6367

Acknowledgments In addition to those named above, other key contributors were Bernard

Anderson, Lorne Dold, Timothy Hopkins, William Lew, Madhav Panwar,

and Agnes Spruill.

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